At a turbulent time for global markets, Nick Kirrage, Co-Head of the Value Team, recently sat down with the Investor Download podcast.
We discussed the current state of financial markets, reflected on the behaviour of investors and how they might best navigate the current turmoil. Below are six key points.
1. Understand what’s driving market volatility
“A huge proportion of the world is going on hiatus for an unknown period of time. Governments have woken up very quickly to the fact that they need to do something.
“There has been a huge amount of stimulus, but there will also be a huge drop-off in demand. The disruption that causes will impact the economy.
“What investors are trying to work out is what effect that will have and whether it will be short-term or long-term. That is what is destabilising markets.”
2. Investor capitulation could present an opportunity
“We use what we refer to as the “psychological circle” to try to gauge the wave of emotions investors go through when managing their investments.
“Imagine a clock face (see image below). At 12 o’clock (the top of the market) there is euphoria; a positive, ebullient environment when people are happy to buy.
“At six o’clock there is capitulation (the bottom of the market). That is when people tend to get out of the situation, selling their investments at just the wrong time.
“I would say we are currently somewhere between three o’clock (fear) and six o’clock (capitulation).
“One of the things about this phase is it can be punctuated by substantial amounts of relief and positivity. People are unsure and they can think everything is going to be okay and that’s why we get mini rallies.
“From our perspective, days of big rallies present opportunities to sell stock where we think we can do better elsewhere. The big negative days, where no one seems to want to buy a single company, could present opportunities time to be buying shares.”
Investors psychological cycle
3. Work with your emotions
“It always amazes me that people commentating on markets will say ‘what we need to do is set our emotions aside’.
“You are going to have work with these emotions. It is better to reflect on your needs in the context of these emotions, rather than trying to argue that we are able to be entirely rational.
“Investors can be irrational. It is not helpful but that is why we get such big swings in markets and that is where opportunities lie.”
4. Remember why you invested in the first place
“What tends to happen is that when times are good you tend to focus on the positives. When times are bad and markets are falling you tend to gravitate towards the negatives.
“No business tends to have 100% good aspects. If it does then it ‘s likely to trade at a valuation that makes it very hard to grow your investment in the future.
“Look at the solvency of the businesses you are invested in and what their obligations are.
“It’s not about getting rid of investments with obligations, but it is about understanding what you own and trying to be balanced about it.
“Before you throw the baby out with the bath water, try to remember what the attributes were that attracted you to those investments in the first place.”
5. Average prices down rather than try to time the market
“Everyone is going to have a view on what markets might do. It may be that it has further to fall, we don’t know.
“As investors we seldom get the bottom of the market. But you can average down your prices to seek the best possible average price over time.
“It is about having a plan. Be brave but be sensible. Be as unemotional as you can be.”
6. Keep your head up and look further down the road
“I always think of investing like driving a car. If you’re trying to drive a car looking six inches in front of the bonnet, it is absolutely impossible. Everything is coming at you too quickly. Everything is changing at high speed.
“But if you actually lift your head, look further down the road and in your rear view mirror things can actually look more stationary.
“In that context you can take stock of what is going on. You can then see the stuff that is in front of the bonnet as either an opportunity or a threat. You can then choose to either get out of the way or a different path, whatever that is.”
Published by Nick Kirrage, Fund Manager, Equity Value, Schroders